What Are the Best Practices of Leading Logistics Companies?

What Are the Best Practices of Leading Logistics Companies

Over the years, having walked through the doors of many companies, I thought that it would be interesting to scribe some thoughts on what are the common characteristics of great logistics companies. Hopefully, the reader has a chance to reflect if some or all of these attributes apply to his or her organization.

In general, the four most important attributes of leading logistics companies are:

An emphasis on hiring the right people (especially in leadership positions)

An emphasis on maximizing the return on assets for every capital expenditure request

A thorough scrutiny of all technology investments

An emphasis on the measurement of key performance metrics.

Investing in Leadership

The most important investment that any company makes is in its people and especially in those who are put in charge. Good leaders have excellent people skills and a strong rapport with employees. When we walk into poorly managed warehouses, we notice when there is an adversarial relationship between management and the people on the shop floor. The cleanliness of the operation is always a good first indicator of how employees view leadership. An operation strewn with broken pieces of pallets/garbage; cluttered operating aisles; and a messy dock provide clear indicators that there is weak discipline within the facility which is indicative of poor management. When operators are not respectful toward the business, they do not take ownership of their actions.

A good logistics manager knows the names of the people on the floor and is quick to receive respect when walking the floor. A good manager should be able to immediately answer questions about “key operating statistics” such as pick rates, throughput per hour, order fill rates, order accuracy %, etc. Managers who don’t have a feel for the numbers do not spend enough time on the floor getting to know the operation. A bad manager usually has the air conditioned office situated furthest from the entrance to the warehouse.

Many of the best logistics managers that I have met over the years have a military background. Their time spent serving their country provided the necessary discipline to manage people and resources in an orderly, planned and structured fashion. Military service also enables these managers to cope with the stresses of chaos which can be a regular occurrence in distribution operations because logistics has the most moving parts that can break within any organization.

Emphasis is on Return on Assets ...But Don’t Fool Yourself Either

Successful logistics companies keep a very close eye on their working capital invested into infrastructure and inventory assets. In actual fact, this philosophy can be taken to an extreme which can be detrimental to net operating profits, so common sense needs to prevail. For example, many companies incur much higher operating expenses for the sole purpose of keeping assets off the books. I can understand why companies lease warehouse facilities, but I see no logic in leasing racking or other fixed storage equipment. This is simply paying more for an asset that would otherwise cost nothing once it is fully depreciated.

Further to this point, many companies hire third party logistics operators to manage their distribution operations for a long list of reasons. I fail to understand why companies have the 3PL manage the lease of the distribution facility because the 3PL applies their management fee to everything they touch. Why not lease directly from the landlord and save the expense for this non-value added expenditure?

Successful companies pay attention to return on assets but they also measure their decisions with other financial metrics to balance ROA against return on investment and net present value. One of the most demanding financial metrics is economic value add (EVA) which is particularly effective because it treats long term leases as assets therefore companies cannot play the game where they make ROA look good but incur substantially higher operating expenses.

Maximize Cash Flow by Minimizing Working Capital Invested in Inventory

In the long term (with emphasis on the word long), companies that thrive are those that have the fastest cash-to-cash cycle which is predicated on achieving the fastest inventory turns. Needless to say, inventory accuracy is a basic requirement to improving inventory turns. If inventory information is out of date or inaccurate, the purchasing department tends to compensate by overbuying and subsequently overstocking.

Many companies have attempted to increase inventory turns through trading partner collaboration programs, such as vendor-managed inventory (VMI) or consignment inventory. Vendor-managed inventory is designed to pass the responsibility of inventory management back to the supplier. The customer informs the vendor how much stock it sells each day, and the supplier tracks and replenishes inventory as needed. This approach is based on the premise that vendors will do a better job at reducing inventory assets than the customer can do for itself because each vendor needs only to monitor its specific items.

One issue with VMI is that people forget to look at whether the total supply chain cost is higher or lower when using a vendor-managed inventory strategy. Instead of ordering en efficient shipment quantity inbound, the company may end up receiving more frequent inbound shipments within a VMI program and there is a cost associated with this higher level of service. In the end, vendor managed inventory is not necessarily about increasing operational efficiency, rather it is a technique to enable suppliers to have greater control over supplying their products to their customers. Ultimately, the goal of VMI is to reduce stock-outs so that both the customer and the supplier can enjoy an increase in sales. This goal needs to be balanced against any increases in operating expenses incurred to do business this way. Suffice to say that VMI is an obvious fit in some industries and a drop-dead dog in others.

In the case of consignment inventory, the customer does not pay for inventory until the product is sold. This reduces the amount of working capital tied up in inventory assets at the customer-level, because the supplier remains the actual owner of the stock until the sale. Unlike VMI which tends to be more of a win-win proposition, consignment inventory tends to be more of a win-lose proposition that has happens in certain sectors of the economy where there is a polarized power base within the supply chain. No names mentioned, but larger retailers have been taking advantage of this strategy as a means to reducing inventory assets on their books.

For companies that view themselves as having only “basic” skills at demand planning/forecasting and purchasing, the obvious move is to invest in advanced statistical forecasting software to improve inventory turns. If buyers have turned into “human calculators reliant upon thick green bar reports, it is usually a sign that outdated software is in place and these companies almost always have too much inventory in the business. Today, there are more choices than ever for inexpensive software applications that do a fantastic job at scientifically improving inventory turns.

A low-cost alternative to improving inventory turns is to track service level by purchasing agent - that is, the sales order fill rate performance of the items that each buyer is responsible for. Stock outs will always happen in any company, but if the products that a buyer handles are chronically out of stock, then this is an issue that must be addressed. Many companies still to this day do not measure inventory turns by buyer which is one effective way to keep buyers from playing it safe and overstocking to keep from shorting an item.

Scrutinize All Technology Investments

Technology is often viewed as a panacea to inefficiencies and poor performance in the warehouse, but companies seem to forget that technology is just a tool. It does not make economic sense to throw expensive tools at simple problems. Successful companies do not invest large sums of money to deal with problems that can be solved with simple methods. However, telltale signs that technology can be beneficial in a warehouse operation include:

Chaos reigns in the warehouse. If the only way to manage is by putting out fires, then you know you have a problem.

Finding inventory is a never-ending adventure. If your inventory system only tracks a product’s inventory at a single bin location (i.e. a single-bin locator system) and you store an item’s inventory in multiple bin locations, then it can be a challenge to track down the product. If employees are constantly searching for inventory, then a technology investment may be in order.

Sales representatives and purchasing associates walk through the distribution center to validate inventory. This indicates that employees have no confidence in the inventory figures in the system.

Scrutinizing a solid business case for technology investments into logistics operations is an important trait of successful companies. These firms ensure that the benefit being proposed is in fact related to the technology investment rather than to a change in operating processes, warehouse layout or other non-technology-related attributes.

Measure Key Performance Metrics

Metrics are an essential component in a successful warehouse, but metrics need to be performed intelligently. There are too many things to measure, and measuring anything costs money. What is being measured should reflect your competitive advantage or core competency. Are you trying to be a service leader or a cost leader? A service leader should focus on key performance indicators in the areas of customer satisfaction, quality, and time. These include measures such as order fulfillment rate, stock availability, on-time delivery, and order cycle time. On the other hand, cost leaders should be more concerned with measuring cost areas such as operating expenses and asset utilization. Common measures include labor productivity, cost for returns, cash-to-cash cycle time, and capacity utilization.

To identify areas where you can cut costs, performing an ABC costing analysis is always a great low cost way to analyze labor costs in the warehouse. Start by identifying all of the different functions in the warehouse operation, such as receiving, putaway, full-case picking, split-case picking, loading, etc. Then measure how many hours employees spend performing each individual function as well as the average throughput rate. Throughput rates should be measured based on each individual functional activity using a meaningful metric. For example, split-case picking may be measured in pieces or order lines picked, while receiving may measure pallets received. Next, look at each operator’s wage rate, including benefits. Based on the number of man-hours and the throughput each operator handled, determine the total labor cost and the average cost per individual unit of throughput. Define the cost per unique transaction type and presto, you have an ABC costing model to enable decision-making based on real dollars and cents.

The ABC costing metrics will show where the money is being spent on labor in the warehouse, allowing you to pinpoint the areas where you can most effectively attack costs. For example, if picking is the largest single labor cost (which it generally is), then you know that is where “the lion’s share of the savings will be and alternate picking strategies can now be isolated for analysis of cost savings.

In short, successful logistics companies worry less about benchmarking their performance against others, rather they focus on benchmarking themselves over time by measuring key performance metrics to determine if improvements are happening.